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Will Eaton (ETN) Prove to Be an Appropriate Value Pick?

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Value investing is easily one of the most popular ways to find great stocks in any market environment. After all, who wouldn't want to find stocks that are either flying under the radar and are compelling buys, or offer up tantalizing discounts when compared to fair value?

One way to find these companies is by looking at several key metrics and financial ratios, many of which are crucial in the value stock selection process. Let's put Eaton Corporation PLCETN stock into this equation and find out if it is a good choice for value-oriented investors right now, or if investors subscribing to this methodology should look elsewhere for top picks:

PE Ratio

A key metric that value investors always look at is the Price to Earnings Ratio, or PE for short. This shows us how much investors are willing to pay for each dollar of earnings in a given stock, and is easily one of the most popular financial ratios in the world. The best use of the PE ratio is to compare the stock's current PE ratio with: a) where this ratio has been in the past; b) how it compares to the average for the industry/sector; and c) how it compares to the market as a whole.

On this front, Eaton has a trailing twelve months PE ratio of 15.86. This level compares favorably with the market at large, as the PE ratio for the S&P 500 comes in at about 19.89.

If we focus on the long-term trend of the stock the current level puts Eaton's current PE in its median zone, with the number having been in an upward trend since the beginning of 2016. Hence, this does not provide us with a conclusive direction as to the relative valuation of the stock in comparison to its own historical trend.

Further, the stock's PE also compares favorably with the Zacks classified Machinery - Electrical industry's trailing twelve months PE ratio, which stands at 19.05. At the very least, this indicates that the stock is relatively undervalued right now, compared to its peers. In fact, Eaton has historically always traded at a PE less than that of the industry's over the observed term.

PS Ratio

Another key metric to note is the Price/Sales ratio. This approach compares a given stock's price to its total sales, where a lower reading is generally considered better. Some people like this metric more than other value-focused ones because it looks at sales, something that is far harder to manipulate with accounting tricks than earnings.

Right now, Eaton has a P/S ratio of about 1.55. This is lower than the Zacks categorized Machinery - Electrical industry's average, which comes in at 1.98 right now. In fact, the figure has been consistently lower than that of the industry since mid-2013.

However, as we can see in the chart above, the current level is towards the higher zone for this stock in particular over the past few years. This suggests that the company's stock price has already appreciated to some degree, relative to its sales.

Broad Value Outlook

In aggregate, Eaton currently has a Zacks Value Style Score of 'A', putting it into the top 20% of all stocks we cover from this look. This makes Eaton a solid choice for value investors, and some of its other key metrics make this pretty clear too.

For example, its P/B ratio (used to compare a stock's market value to its book value) stands at 1.99, lower than the industry average of 2.41. Clearly, ETN is a solid choice on the value front from multiple angles.

What About the Stock Overall?

Though Eaton might be a good choice for value investors, there are plenty of other factors to consider before investing in this name. In particular, it is worth noting that the company has a Growth grade of 'B' and a Momentum score of 'B'. This gives ETN a Zacks VGM score-or its overarching fundamental grade-of 'A'. (You can read more about the Zacks Style Scores here >> )

Our VGM Score identifies stocks that have the most attractive value, growth, and momentum characteristics, and a good VGM score can increase your odds of success. All things considered, Eaton seems to have pretty striking prospects.

However, the company's recent earnings estimates have been mixed at best. The current quarter has seen one estimate go higher in the past sixty days compared to none lower, while the full year estimate has seen no upward revisions and one downward revision in the same time period.

This has had a very small impact on the consensus estimate though, as the current quarter consensus estimate remained constant in the past two months, while the full year estimate inched lower by 0.2%. You can see the consensus estimate trend and recent price action for the stock in the chart below:

Eaton Corporation, PLC Price and Consensus

Eaton Corporation, PLC Price and Consensus | Eaton Corporation, PLC Quote

This somewhat mixed trend is why the stock has just a Zacks Rank #3 (Hold) despite strong value metrics and why we are looking for in-line performance from the company in the near term.

Bottom Line

Eaton is an inspired choice for value investors, as it is hard to beat its incredible lineup of statistics on this front. However, with a sluggish industry rank (Bottom 27% out of more than 250 industries) and a Zacks Rank #3, it is hard to get too excited about this company overall.

The industry has been experiencing weaker conditions in some of its markets internationally. The prolonged sluggish conditions in the end-markets are expected to continue, with margins suffering the impact of higher pension and interest expenses in 2017.

Notably, the industry has underperformed the broader market over the last two years, as you can see below:

Despite such broader negative factors the fact remains that Eaton is undertaking various measures to cope with the challenging environment. The company has planned a restructuring program which aims to lower fixed structural costs and entail cost savings. Moreover, the quality of products supplied by the company enables it to retain a strong market position.

So, value investors might want to wait for analyst sentiment to turn bullish in this name first, but once that happens, this stock could be a compelling pick.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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